SIXTH JOINT COMMITTEE on the SECONDARY LEGISLATION of the EUROPEAN COMMUNITIES
REPORT NO. 10
REFORM OF THE COMMON AGRICULTURAL POLICY
(24 July, 1991)
1In February 1991, the EC Agricultural Commissioner Mr. Ray MacSharry, circulated a paper to the Council of Ministers for Agriculture of the European Community on the reform of the Common Agricultural Policy (CAP). This paper was circulated in the context of a rapid increase in European Community (EC) intervention stocks and a projected increase in CAP spending in excess of budgeted resources. The paper was also circulated at a time when discussions on the Uruguay Round within the General Agreement on Trade and Tariffs (GATT) were near break down on the issue of agricultural trade.
2The CAP has often been described in the past as being confronted by a “crisis” as a result of rising expenditure or increasing stocks held in intervention stores or challenges from third countries affected by the export of subsidised commodities. On this occasion however, the imbalances in commodity markets, the international ramifications of these, and the budgetary implications make it clear, even to its strongest supporters, that there are deep seated problems in the CAP requiring basic reform. In fact, the need for some type of fundamental reform of the CAP is not disputed in any of the submissions to the Joint Committee by the Irish farm bodies.
3On the other hand, agriculture is an important industry in Ireland in that it employs 160,000 people directly, supports many more thousands in industries supplying inputs and processing outputs from agriculture and contributes about one third of Irish exports. In relative terms, agriculture is more important to Ireland than to most other EC member states. Since accession to the Community, the Common Agricultural Policy has become a vital support of the industry. For instance in 1990, transfers from the CAP to Ireland were equivalent to about 80% of agricultural income.
4It was against this background that the Joint Committee decided to examine the Commission’s proposals for the reform of the CAP. It was also decided to examine the Council’s decisions on prices for agricultural products for 1991/92. The specific documents examined by the Joint Committee were:
“Commission Communication to the Council: Development and Future of the CAP” (Com(91) 100 final), Brussels, 2 February, 1991. (The “reflections” document).
“Council Regulations (EEC) 1622-40/91 of 13 June, 1991 on the Prices for Agricultural Products and on related Measures for the 1991/92 marketing year.”
“Communication of the Commission to the Council and the European Parliament: The Development and Future of the Common Agricultural Policy” (Com(91) 258 final), Brussels, 11 July 1991.
5The Sixth Joint Committee has already examined a number of proposals affecting agriculture. These include Council Directives and Regulations on intra-Community trade in horses and safety of animals during transport (Report Number 5) and the CAP regulations with respect to milk quotas (Report Number 2). Various aspects of the CAP have been examined by earlier Joint Committees, notably “Adaptation of the CAP”, (Report Number 2, Fourth Joint Committee) (Pl 2254), and “Perspectives of the CAP” (Report Number 26, Fourth Joint Committee)
6The proposals of the European Commission relating to the reform of the CAP, and the Council’s decision on agricultural prices for 1991/92 were examined for the Joint Committee by the Sub-Committee on Agricultural and Fishery Matters under the Chairmanship of Deputy John Ellis. The Joint Committee is indebted to Deputy Ellis and his colleagues on the Sub-Committee for the substantial volume of work which they performed so diligently on its behalf. The Joint Committee would also like to acknowledge the assistance of Mr. James Dorgan, consultant in preparing the report.
7In carrying out its work, the Sub-Committee received considerable assistance in written and oral form from the Department of Agriculture and Food. In addition, the Irish Farmers’ Association (IFA), the Irish Creamery Milk Suppliers Association (ICMSA), and the Irish Cooperative Organisation Society (ICOS) made oral and written submissions to the Sub-Committee. The United Farmers Association and An Bord Bainne also made written submissions.
8The Joint Committee would particularly like to thank Mr. Michael Corry, Mr. Dan Byrne, Mr. Danny Carroll, Mr. Gerry Cody, Mr. Dermot McCarthy and Mr. John Fox of the Department of Agriculture and Food; Mr. Con Lucey, Chief Economist, IFA; Mr. Tom O’Dwyer, President, and Mr. Donal Murphy, General Secretary, of the ICMSA; and Mr. John Tyrrell, Director General of the ICOS, all of whom attended meetings of Deputy Ellis’s Sub-Committee and generously gave the Sub-Committee the benefit of their knowledge and experience. The Sub-Committee would also like to acknowledge a written submission received from Mr. Sean Scanlan, President of the United Farmers Association and Mr. Nicholas Simms, Market Research Manager of An Bord Bainne.
Objectives of the CAP
9Virtually no country in the world allows a free market in the supply and demand for food. This is justified partly on strategic and socio-cultural grounds such as the need for security of supply and to preserve the fabric of rural society. The need to protect vulnerable members of society (i.e. small farmers) and to control the “flight from the land” are also arguments invoked to justify intervention by governments throughout the world in the agricultural industry. In addition, on a more pragmatic level, agricultural markets, left to themselves are subject to violent fluctuations in prices and supplies. This makes it difficult for producers to adopt efficient practices and to invest in stock, buildings and plant. Price fluctuations also make it difficult for processors to plan ahead and for consumers to manage their family budgets.
10Thus, when the EC was being established it was fairly readily accepted that there should be a Common Agricultural Policy which would replace the agricultural policies of the six founding member states. The objectives of this policy are stated in Article 39 of the Treaty of Rome as being to:
increase agricultural productivity;
ensure a fair standard of living for farmers;
stabilise agricultural markets;
guarantee regular supplies of food;
ensure reasonable prices of food for consumers.
11Three principles were adopted upon which the CAP was to be based. These are:
Single Market: Agricultural commodities should move freely between the member states. This requires common prices, stable exchange rates in the agricultural sector, and approximation of health care, administrative and veterinary rules and regulations.
Community Preference: Priority must be given to EC produce over that of other countries. This requires protection against imports mainly through the use of levies.
Financial Solidarity: The cost of the policy should be borne by the Community rather than by the individual member states.
12The instruments for effecting this policy vary from commodity to commodity. But in general the means adopted by the Community include:
Intervention purchasing of commodities when they are in surplus supply and selling them when balance has been restored or disposing of them outside the EC;
Quotas, levies and tariffs on imports to prevent external supplies undercutting domestically produced commodities. These instruments are used to complement the intervention mechanism;
Direct subsidies to producers for the use of Community produced commodities where competing commodities are imported freely. These commodities include cereals substitutes;
Flat rate aids are paid for the production of a small number of commodities.
13Particularly since the 1970s, these instruments have been complemented by an increasing range of “structural” measures aimed at modernising farms, consolidating holdings into viable units, switching production from surplus commodities, encouraging older farmers to retire and so on. Differential rates of incentives are available in less developed areas.
Emergence of Oversupply
14Agricultural output responded to the conditions created by the CAP after it was set up in the late 1950s, and output rose rapidly. Self sufficiency was reached in many important commodities by the early 1970s and by the late 1980s the only significant deficit commodities were sheepmeat and fresh fruit. On the other hand major surpluses had built up in dairy products, cereals and beef. Disposal of these surpluses proved expensive for the EC budget. In addition, where sales were made on the world market, prices were driven down and friction generated with other food exporters, notably the US.
15However, because so much of the increase in farm spending went on storage and disposal of surplus stocks as opposed to supporting prices, farmers gained relatively little. In fact, an ironical aspect of the CAP is that EC farm incomes are lower in real terms than they were in the mid-1970s. At the same time, the increase in farm spending has been rapid enough to put great pressure on the Community’s finances.
16A further difficulty has been that the benefits to the agricultural community have not been evenly distributed. Because so much of the CAP’s incentives are production related, the farmers in a position to increase output have gained disproportionately. These tend to be the larger farm enterprises which have access to capital for acquiring land, equipment, livestock and buildings necessary to increase output and reduce costs. The smaller farmers in disadvantaged areas have neither the financial nor the natural resources to capitalise on the CAP in this way. Thus the incidence of low incomes in agriculture, the elimination of which is a primary objective of the CAP, has remained.
17Two major attempts have been made by the EC to grapple with some of these problems. The first package was developed in 1984 and included the imposition of quotas on milk production. This was accompanied by a gradual reduction in prices and by adoption of the principle of co-responsibility - the requirement that producers bear the cost of disposing of stocks over a certain level of production. However, largely as a result of the deterioration in world markets, CAP spending continued to soar. In 1988 the EC adopted a further set of measures including the “budget stabilisers” whereby prices drop in line with the excess of production over a specified level. Incentives to farmers to set aside land from production was also introduced at this time. The acceptance of these measures in 1988 was part of the agreement which permitted the doubling of the structural funds in preparation for the Single European Market in 1992.
18These were major departures from the principles upon which the CAP had been based, which, as paragraph 12 notes, involved reliance on intervention, export subsidies and controls on imports. In combination with a clear-out of interventions stocks, this last package of measures was successful, but only temporarily. In the last year or so world markets have deteriorated as a result of the Gulf War, a decline in consumption of certain products and the withdrawal of the Soviet Union from the market. The result is that intervention stores have begun to fill up again, and CAP spending is once more on a steeply rising path. See Table 1 following.
Source: European Economy, November 1990. Commission of the European Communities, Brussels.
C. THE COMMISSION’S PROPOSALS
Official and Unofficial Proposals
19The Commission’s initial thoughts on reform of the CAP were outlined in a “reflections” document which was considered by the Council of Ministers on 4 February 1991. This document was intended to restate the objectives of the CAP and “..to present for general reflection certain guidelines capable of implementing the objectives of the agricultural policy….”. Subsequently, Commissioner MacSharry presented a further document to the Commission which was adopted and presented on 11 July 1991 to the Council and the Parliament. This document gives details of how the principles outlined in the reflections document are to be implemented.
20It is necessary to note that in February 1991 a document, dated 6 December 1990, containing detailed proposals for very radical reform of the CAP was apparently leaked from the Commission. The Commission denied that this leaked document had any status, but it was widely believed by farming interests that it represented the Commission’s thinking at the time. Until the publication of the latest proposals on 11 July 1991 much comment on the CAP proposals was based on the contents of this leaked document. This includes some of the representations made to the Joint Committee. Following the release of the official proposals, farm groups are now in the process of reviewing their positions. It can be said, however, that while there are differences, the official proposals, especially when taken in conjunction with the 1991/92 price package, are not radically dissimilar in their effects on grass based commodities such as cattle, sheep and milk to those leaked in February 1991. The submissions made to the Joint Committee, even where there has not been time to adjust them in the light of the proposals of 11 July, are still relevant.
THE REFLECTIONS PAPER
21The reflections paper identifies the following as the main problems which have developed in the operation of the CAP over the last number of years.
1The CAP’s support mechanisms have stimulated an increase in production which is beyond the capacity of the market to absorb, leading to the accumulation of costly intervention stocks;
2The support mechanisms have also stimulated an intensification of agriculture which is damaging to the environment;
3Income support is mainly related to production with the result that larger farmers benefit disproportionately;
4Despite large outlays under the CAP, the purchasing power of those in agriculture has improved little over the last 15 years;
5The growth in CAP expenditure is posing increasingly intolerable burdens on the EC budget.
Effectiveness of Earlier Reforms
22The paper then reviews measures of reform which were undertaken in the past, especially in 1985 and 1988. While acknowledging that these reforms helped to curtail the growth in output, the weakness in world agricultural markets has led to the re-emergence of significant imbalances in the last year. Moreover, at the time of writing the Commission believes that there is every likelihood that these will continue to grow rapidly in the near future if action is not taken.
23The Commission emphasises that the principal element in the 1988 reforms (i.e. the “stabilisers”) was not intended to effect a fundamental reform of the CAP while the measures aimed at reducing production through set aside, etc, were not fully implemented in the member states.
24The Commission then proceeded to outline the objectives of the revised CAP.
1The principles in the Green Paper “The Future of Rural Society” are endorsed. Policy will aim to protect the family farm. The farmer, in turn, will be guided to meet the Community’s need for food and to preserve the rural physical environment. He will therefore have a dual function as a food producer and as a protector of the rural environment.
2Policy will also encourage farmers to become involved in non-food agricultural products and in non-agricultural activities based in rural areas.
3Production will be controlled to the degree necessary to bring markets back into balance. Prices and quantitative restrictions will continue to be used. “Extensification”, meaning production systems which yield less output per acre, and so make fewer demands upon the environment, will also be encouraged.
4The Community will accept its responsibilities as a leading importer and exporter of food. Policy will aim to ensure the competitiveness on world markets of EC agriculture.
5The CAP will continue to be based on the original principles of financial solidarity, community preference and a single market.
6There will be a shift from support by means of prices to direct supports related to the size of farm or the number of livestock. But these aids will be “modulated” depending on the income of the recipient and the economic development of the region.
25The document then went on to comment on the sort of proposals that would be considered for each of the main commodities.
1Cereals: Prices to be reduced to make cereals competitive with substitutes. Compensation to producers to take the form of aid on a per hectare basis. Smaller farmers to get full compensation; larger farmers to get partial compensation. (A corresponding regime to apply to oilseeds and proteins). Stabilisers and the co-responsibility levy to disappear.
2Livestock: The reduction in cereals prices would reduce livestock prices. Direct aids to become relatively more important and to be linked to extensificataion procedures.
3Milk: Quotas to be reduced.
4Other: Other sectors, especially sugar and tobacco to be reformed on a similar basis.
5The farmer to be encouraged to protect the environment by, for example, using less harmful inputs and encouraging set aside of land for afforestation and protection of the natural environment.
6Existing pre-pension schemes for farmers to be improved by means of increased premia, and greater flexibility.
26The Commission then responded to two lines of counter argument.
1That modulation of support in relation to the size of holding would be discriminatory and non-economic.
The Commission replies that the fact that the bulk of CAP spending has been going to large rather than small farmers indicates that the present situation is discriminatory. As far as economics are concerned, larger farms should be capable of being self-sustaining without aid from the CAP.
2That the shift from price supports to direct aids would mean transferring the burden of support from consumers to the budget and so increase budgetary costs.
The Commission replies, in effect, that any increases in the agricultural budget may be justified having regard to the benefits to both consumers and producers of the reformed CAP.
DETAILED PROPOSALS OF 11 JULY 1991
27This document repeats the general sense of the reflections paper but in addition proposes specific measures. These are as follows:
1Cereals: Support prices to be cut by 35%. Compensation to be introduced to make up for lost income at the rate of about £90 per acre. Farms up to about 50 acres to receive this on all of their cereals area, while for farms up to about 125 acres compensation to be conditional on set aside of 15% of the area. For farms above 125 acres compensation to relate only to the 85% not set aside.
2aMilk Quotas: Global quotas to be cut by 4% with 1% being redistributed to certain categories of producers including those in less favoured areas. This means a net cut of 3% (which should be added to the 2% cut in the 1991/92 prices package). Member states must set up a voluntary cessation scheme which the Community will part-finance so that producers of less than 42,750 gallons will be able to avoid quota cuts if a significant pool of milk is created. Farmers whose quotas are cut will receive compensation of £.2057/gallon for ten years which member states may top up.
2bMilk Prices: Butter intervention prices to be cut by 15% and Skimmed Milk Powder (SMP) intervention prices to be cut by 5% (a 10% average cut for milk). To compensate extensive producers (i.e. those using grass rather than feeds who will not benefit from the fall in cereals prices) a premium of £66 to be payable for every cow up to 40 cows and subject to a stocking limit of 0.8 livestock unit (LU) per forage acre or 0.6 LU/ acre in less favoured areas. The co-responsibility levy to be abolished.
3Beef: Intervention prices to be cut by 15%. To compensate producers on extensive grass land production systems who will not benefit from the fall in feed prices, the male bovine premium will be increased to £158 per animal for the first 90 animals. The annual suckler cow premium will also be increased. Extensive producers are defined as those with a stocking limit up to 0.8 LU/acre or 0.6 LU/ha in less favoured areas. A special premium will be introduced at the rate of £88 per animal for the early disposal (8/10 days) of young males calves from dairy farms.
4Sheep: The ewe premia to be payable on the average number of eligible ewes in each flock in 1990. Only flocks of less than 750 ewes in disadvantaged areas, and flocks of 350 in other areas, to be eligible.
28Accompanying Measures: The Commission proposes a number of measures which are “complementary to the changes proposed in the market organisations and which offer special opportunities for rural development.”.
1The Community to co-finance incentives to farmers to introduce environmentally friendly farming practices. The Community’s share to be a maximum of £89/acre.
2Incentives for both the capital costs of afforestation, maintenance, and income foregone pending maturity of trees to be substantially increased.
3Aids to encourage farmers to retire early to be increased to a maximum of £7,500 per capita.
29The measures are to be implemented over a three year period and when fully implemented will cost 2300 million ECU over the budget provided for 1992. However, the CAP budget would have increased by 3300 million ECU by 1997 under existing arrangements. To this must be added the cost of the “accompanying” measures which are estimated to cost 4000 million ECU over five years. The Commission argues that the cost of these measures should be funded from new chapters in the budget. It proposes that, when account is also taken of the cost of German unification, the agricultural guideline ought to be increased by 1500 million ECU.
Source: “Development and Future of the Common Agricultural Policy: Communication of the Commission to the Council and the European Parliament”. Com (91) 258 final. 11 July 1991
D. VIEWS OF INTERESTED PARTIES
30Although the submissions by the farm bodies covered a variety of objectives, there was considerable unanimity on the objectives which the CAP reforms should be seeking to attain:
Protecting the viability of the family farm and of rural areas;
Maintaining the international competitiveness of EC agriculture;
Reducing income disparities as between less favoured areas and industrialised centres;
Raising incomes on what are now low income farms;
Enhancing environmentally-friendly farming practices.
EXTERNAL TRADE RELATIONS
31The threat to the CAP in its present form in part emanates from international reaction to the effect of EC exports of surplus production. A very large part of the thrust of the recommendations of Irish interested parties is therefore directed at securing trading arrangements which, drawing on the principles of the CAP, respect Ireland’s position as a relatively poor country, heavily dependent on exports of temperate food products.
32Therefore Irish agricultural groups are arguing strongly for re-emphasis of the principle of Community Preference and for an agreement within the current round of GATT negotiations, which protects Ireland’s position. In specific terms this means:
A reduction in imports of temperate food products;
Rebalancing within the cereals sector;
Reciprocal restrictions on exports by other agricultural producers;
Establishment of minimum import prices;
Postponement of the CAP reforms until after the conclusion of the GATT talks.
33Amidst all the criticism of the CAP from the US and Cairns Group countries1, and from internal critics, it is easy to overlook the fact that the EC is the largest food importing region in the world. In 1989, EC food imports were valued at US.$64 billion or over 20% of world agricultural imports. With exports valued at $40 billion, the EC was even a substantial net importer. These imports include substantial volumes of products of which the EC is not only a producer, but also of products which are in surplus in the EC. For example, in 1988, the EC imported $2.9 billion of meat imports, $829 million of milk and eggs, and $1.6 billion of cereals.
34These figures do not tell the whole story since the Community is also a major exporter of many of these products. Nevertheless, given the principle of Community Preference, it is not surprising that the interested parties have argued very strongly that further controls should be placed on these imports. As the ICOS puts it “preferential imports which cause market imbalance should be vigorously monitored and controlled in a manner which takes full account of the market situation of products in the internal EC market.”
35The IFA in its submission points out that the restoration of Community Preference will require the agreement of the EC’s trading partners. However, the IFA believes that this should be obtainable if the EC in return undertakes a supply management policy aimed at limiting production, and so reducing export refunds and import levies. The IFA points out that under Article XI of the GATT, members are entitled to extend such supply management arrangements to imports.
36The EC is a major exporter of cereals and there are strong demands from its trading partners for the Community to reduce the degree of support which it gives to cereals production. In fact the EC has made substantial cuts in its incentives for cereals production in recent years. However, the EC is also a major importer of cereals substitutes for animal feeds. These are extensively used on the continent for dairy production and in that capacity they are competition for Ireland’s grass based production. A strong demand from Irish farm groups is for “rebalancing” the reductions in support for cereals, including export subsidies, with levies on the import of these cereals substitutes. The IFA argues that reduction in export refunds by the EC would be a “quid pro quo” for acceptance of rebalancing by the EC’s trading partners. This objective is in fact included in the EC offer in the GATT negotiations. However, it is not adverted to in the reform proposals.
37The rebalancing argument is part of the wider claim by Irish farm groups that reductions in CAP support for exports should not be made unless restraints are also imposed by other agricultural exporters. Since 1985, the actions by the Community have in fact cut back agricultural production. But other producers such as the US, Australia and New Zealand have continued to increase their output. The depressed condition of world markets is therefore, according to Irish farm groups, partly the consequence of unchecked growth in farm output by these countries. The ICOS points out that over 70% of the reduction in EC milk production since 1983 has been taken up by increased production in other countries including the US and Australia. And the ICMSA in their submission to the Joint Committee bluntly stated that in this context “..the misguided and nonsensical policy of unilateral reductions in supply which have been pursued by the EC should stop.”
38The need for such reciprocity has been officially recognised by the EC. Were it to be granted by the EC’s trading partners, the effect would be to alleviate CAP budget problems and to stabilise world agricultural markets. The ICOS believes it would also facilitate an orientation by EC farmers towards quality produce.
Dual Price System
39A logical implication of these arguments for reciprocal supply control is that the EC should maintain its dual price system by means of import levies so that the EC farmers can benefit from the effects of the reduction in global supplies.
40These considerations have led the ICOS, in particular, to argue that it would have been preferable to reach agreement with the Community’s partners in GATT before publishing proposals for reform of the CAP. In the ICOS view, the reform proposals will simply be taken by the US and the Cairns Group as the beginning point for discussions and they will push for further concessions in the trade talks. But given that the proposals have been published the ICOS view is that no further action should be taken until the GATT talks are completed.
PROPOSALS FOR THE MAIN COMMODITIES
41The principle of community preference and reciprocal supply are viewed as essential by the farm bodies in their observations about the organisation of the market for dairy products. In their view it is essential to reduce imports of dairy products and to maintain export subsidies. The EC’s trading partners should also agree to production cuts.
42In addition to these applications of general principles already discussed, the Irish agricultural organisations made a number of specific recommendations about quotas. These included:
1Attainment of internal balance in the EC market should take the form of a reduction in the Community milk quotas and not reductions in prices.
2Ireland should not be required to reduce its quota. The farming bodies argued that the Community had guaranteed a preferential position for Ireland in this regard in 1984 when the quotas were first introduced.
3The ICMSA argued that quota cuts should be voluntary and achieved through improved incentives for voluntary cessation.
4Reductions in quotas should fall on intensive farm operations such as those producing 1300 gallons/acre.
43There were also a number of other recommendations:
1The ICOS recommended the establishment of a reorientation fund to enable peripheral processors to become competitive. The ICMSA argued for compensation for processors for the differential impact on them of cuts in butter prices.
2The ICOS and the IFA argued for the replacement of the co-responsibility levy with a general levy to be applied for the promotion of dairy products throughout the EC. The example of the US dairy industry’s successful publicity campaign was quoted in this connection.
3The IFA also argued that it was necessary to introduce a scheme to enable small producers to buy quotas. Without such a scheme small producers would never be able to expand and there would be a danger that the structure of production of the industry would become frozen.
44The United Farmers Association proposed an alternative approach based on a differentiated price structure. As an illustration of how such a price structure would operate they propose that farmers should receive £1.10/gallon for the first 10,000 gallons (as compared with £.85-£.90 now), £1.025/gallon for the second 10,000 gallons and so on down to 40,000 after which only the open market price would be available.
45The ICOS argued that the proposed price cuts were excessive in relation to the market for beef. It contended that the current surplus was due to special factors.
46All farm bodies are agreed that there should be effective control of imports of cattle and beef. Thus, the ICOS argued that agreement of the GATT trading partners to lower levels of preferential import of cattle and beef should be obtained. These concessions would be “quid pro quo” for the cut backs in the dairy sector. Illegal imports of cattle and beef should be stopped by effective action by the EC.
47Likewise, both the IFA and the ICOS argued also for the retention of export refunds which are of particular benefit to the Irish industry with its heavy dependence on exports to third countries.
48All farm bodies are agreed that the intervention mechanism needs to be retained and indeed strengthened so that it effectively delivers desired income levels to farmers. The IFA urged that a slaughter premium be introduced for calves aged 3 to 6 months whenever the market threatens to become over-supplied.
49The IFA and ICOS also argued for the introduction of premia which would be counter-seasonal and thus help eliminate a major disadvantage faced by Irish farmers and processors.
50A number of proposals are made specifically to help farmers in low income regions or on low income farms. The ICMSA urged that a deficiency payment scheme should be introduced which would ensure that farmers with 80 LUs in disadvantaged regions should generate the same income as the average industrial worker. The IFA recommended a new initiative aimed at helping farmers on low income farms. This would take the form of a direct payment to farmers based on assessment of their income rather than the size of their livestock or holding.
51The basic objective of the ICMSA in this area is that EC supports should be such that a 350 ewe flock should be sufficient to yield the same income as the average industrial worker.
52The ICOS urged that eligibility for the ewe premium should be based on the current size of flocks rather than the average from 1987-89. The ICOS’s point is that the Irish flock has increased rapidly in this period and the application of the 1987-89 average would therefore lead to a reduction in the number eligible ewes in Ireland by about 1 million. (This point is met to some extent in the 11 July 1991 document which proposes that 1990 should be the reference date for flock levels.) The IFA added that outside less favoured areas, the eligible flock size should be 500 ewes (not 350 ewes as proposed).
53The IFA recommended that the EC limit imports of sheepmeat to the actual deficit in the EC’s internal supply. Alternatively, the IFA urged that export refunds should be introduced. In order to protect the profits of existing sheep producers, the IFA argued that the EC should not allow more land to be transferred to sheep production in the EC. The ICOS also argued in favour of limits on imports.
54The proposal to reduce EC cereals prices is seen by all farm groups as a major threat to Ireland’s grass based agriculture. The ICOS adds that imports of cereals into Ireland (to make up for the decline in domestic production caused by the Commission’s proposals) will further add to costs of Irish producers through extra transport charges. Both ICOS and the IFA argue that the proposals as they stand will encourage intensification.
55In addition, the ICOS argues that reducing the price of EC cereals will not prevent the import of cereals substitutes many of which are by-products and have negligible marginal costs of production. All farm bodies urge that rebalancing levies be imposed on imports of cereals substitutes in order to maintain the competitiveness of EC cereals. However, the IFA suggests that in return, the EC could offer to limit export refunds.
56The ICOS urges that set-aside should be voluntary, financed by the EC and land released should be available for non food purposes.
57The IFA urges that prices should be pitched so that the medium sized producer, in whatever EC member state, should be able to earn a reasonable living. As things stand, price cuts are rendering it possible for only the largest producers to survive. The ICOS contends that direct income aids are needed to help certain low income cereals farmers to survive.
58In the case of cereals the United Farmers Association urges a differentiated price structure similar to their proposal with regard to milk. As an example of one possible structure, they suggest that compensation could be £125/ton on the first 25 acres of cereals, £100/ton on the second 25 acres and £75/ton for the third 25 acres. Thereafter, prices would be those prevailing on the open market.
59The ICOS urged that a market orientation fund should be set up to help processors in peripheral areas to become fully competitive with better placed rivals. This fund would assist with marketing, product development, branding and other activities related to developing a position in EC food markets.
60The IFA urges a special EC programme of research and public information on the quality of food to offset misleading publicity, particularly with respect to animal fats.
61An effective EC financed farmer retirement and pre-retirement scheme is urged by both the IFA and the ICMSA.
EFFECTS OF PROPOSALS
62Estimates of the effects of the reform on agriculture have been made by both the IFA and the ICOS. At the time of writing, these estimates are being finalised in the light of the Commission’s proposals of 11 July. Inevitably, with the proposals still to some extent unclear, these estimates cannot be regarded absolutely reliable. Still, the Joint Committee considers it important to try and quantify the consequences of the proposals, even at this early stage. Estimates by the ICOS, which are the most complete to hand, indicate that the proposals will reduce the value of gross agricultural output by about £400 million or 13% compared with 1990. The reduction in income arising in agriculture (after allowing for the increase in subsidies proposed in the reforms) will be about £211 million or 12% of 1990 farm income.
63However, the ICOS points out that the costs of the 1991/92 farm price package, and recent decisions by the Dairy Management Committee also need to be taken into account. These constitute additional reductions in the value of gross agricultural output of about £190 million bringing the total estimated loss in agricultural output to £590 million or 19% of 1990 output. Likewise the fall in farm income amounts to £390 million or 22% of the 1990 level.
The ICOS Estimates
64The details of the ICOS estimate of the effects may be summarised as follows:
1Milk: The quota cut of 3% and the price cut of 10% will cause a drop of £131 million in the value of milk production. To this should be added the effects of the 1991/92 price package of £84 million bringing the total loss to £215 million.
2Beef: The value of beef output will fall as a result of the 15% price cut and the knock-on effect of the cut in quotas which is estimated by the ICOS at 2%. The total loss is £203 million to which should be added the effects of the 1991/92 package bringing the total to £305 million.
3Sheep: The fall in the price of sheepmeat resulting from the fall in cereal prices will amount to about £21 million.
4Pigs and Poultry: The fall in cereal prices will reduce prices by about £36 million in these two sectors.
5Cereals: The drop in prices will be offset by compensation payments, but there will also be a decline in the volume of output valued at about £16 million.
6Inputs and Subsidies: On the positive side, the value and volume of inputs will decline by about £106 million due to the fall in cereal prices and the decline in the volume of gross agricultural output. In addition the increased headage payments will be worth an extra £88 million.
Source: “Evaluation of the Effects of the Reform Proposals”, ICOS, 12 July 1991
The ESRI Estimates
65During the course of the Joint Committee’s consideration of the CAP reform proposals the Economic and Social Research Institute published estimates of the effects of the proposals in its “Medium Term Review 1991-96” and it seems appropriate to consider these estimates. According to the ESRI, the fall in the value of gross agricultural output would be £529 million (a fall of 17% on 1990) and a decline in farm income of £195 million (a fall of 11% on 1990). It should be noted that the ESRI estimates were made on the basis of the “leaked proposals”. Also, the ESRI did not include the effects of the 1991/92 price package.
The ‘Knock-On’ Effects
66As paragraphs 68 to 73 below indicate agriculture is a central part of the economy with important linkages in terms of employment and income to other sectors. The indirect effects on these sectors include declines in inputs of materials and services to agriculture, declines in outputs of raw material for processing and a decline in general economic activity resulting from the fall in farmers’ consumer spending. Estimating these effects is difficult. But in the view of ICOS, the indirect effects might be of the same magnitude as the direct loss to agriculture which would be a gross loss equal to about 3% of 1990 GNP.
67The ESRI’s view is that the fall in food prices will stimulate the economy’s competitiveness and this will lead to offsetting gains in employment and income elsewhere in the economy. However, the ESRI also points out that the decline in prices will raise the real burden of the national debt, and the subsequent rise in taxation required to meet this burden will reduce GNP by 1.5%.
E. VIEWS AND RECOMMENDATIONS OF THE JOINT COMMITTEE
IMPORTANCE OF AGRICULTURE
68Despite the growth and importance of industry and traded services in the Irish economy in recent decades, agriculture still remains very significant in terms of its impact on employment, incomes and exports. The fact that its purchases are drawn from, and its outputs dispersed throughout the other sectors of the economy may sometimes lead to an underestimation of its significance. Before any assessment of the proposed CAP reforms is made the Joint Committee believes that it is appropriate to review a few summary measures of the role of agriculture in the Irish economy.
69160,000 people or about 14% of the total number at work in Ireland, are directly employed in agricultural activities. To this must be added those in distribution, professional services, building and manufacturing who owe their employment to agriculture from supplying the range of feeds, fertilisers, chemicals, technical advice, buildings and equipment consumed by agriculture every year. On the processing side, there are about 20,000 persons employed in creameries, slaughter houses, and some other food processing industries which are dependent for their employment on the supply of raw materials from agriculture in Ireland.
70The gross value of the output of agriculture is (1990) about £3.2 billion. In terms of value added, it accounts for £2 billion which amounts to 9% of GNP. As paragraph 66 notes, the income effects of the upstream and downstream activities referred to above cannot be estimated accurately. However, these linkages could generate added income in the region of another £2 billion. Thus about 18% of Irish GNP is either directly or indirectly accounted for by agriculture.
71In 1990, Irish agricultural exports were valued at £2.1 billion, or about 15% of total merchandise exports. Exports of industrial goods were valued at £11.9 billion. However, in comparing the impact of the two it is necessary to take account of imports of materials and, in the case of industry, of profit repatriation from foreign owned manufacturing industries. In 1990, these combined outflows were valued at £8.8 billion in the case of industry. Imports of agricultural materials were only £0.5 billion. When these amounts are netted out, agriculture is seen to contribute about 33% and industry about 67% of the country’s “net” exports.
Regional Aspect of Agriculture
72These measures are, of course, for the country as a whole. In the less developed parts of the country, agriculture is, almost by definition, more significant than the average for the whole of Ireland. Raising national standards of living is of course an important national economic objective, but ensuring a better distribution of income throughout the country is also an important objective. Obviously, a decline in the fortunes of the agricultural sector would seriously retard progress towards that objective.
73Finally, the Joint Committee believes that it is useful in the context of the reform of the CAP proposals, to advert to the relative importance of agriculture in Ireland as opposed to other Community member states. With the exception of Greece and Portugal, Ireland has the highest proportion of the work force engaged in agriculture and, with the exception of Greece, the highest proportion of GNP derived from agriculture. Moreover, Ireland is particularly dependent on milk, beef and sheepmeat, three of the four sectors most affected by the reform proposals. The fourth sector is cereals which is less important in Ireland than in the Community. But all four commodity groups together account for over 80% of Irish agricultural output as compared with 47% for the Community as a whole. (See Tables IV and V).
Source: The Agricultural Situation in the Community, 1990 Brussels, 1991.
Source: The Agricultural Situation in the Community, 1990 Brussels, 1991.
EC Recognition of Importance of Agriculture to Ireland
74The Joint Committee also thinks it relevant to advert to the several occasions on which the Community acknowledged the importance of improving the condition of the agricultural industry in general, and that in Ireland in particular.
1Article 39.1 of the Treaty of Rome emphasises that the objective of the CAP is to ensure a fair standard of living for the agricultural community. Article 39.2 accepts the need to take account of the position of regions dependent on agriculture in any changes in the CAP.
2The introduction of quotas on milk production in 1984 provided that Ireland’s quota was to be based on 1983 production levels as compared with 1981 production levels for other member states. In 1987, a further acknowledgement of Ireland’s special dependence on milk was given when the Commission allowed a 2% price differential in Ireland’s favour when establishing buying prices through the tendering mechanism.
3The Single European Act enshrined in the Treaty that a major objective of the Community should be the reduction of regional disparities. Article 130B provides that this objective is to be taken into account in the framing and implementation of all common policies, including that of the CAP.
RECOMMENDATIONS ON REFORMS
Justification for Reform
75The Joint Committee accepts that there is a need for a major reform of the CAP. However, it does not wholly accept the Commission’s view of the justification for this reform. First of all, the Joint Committee does not accept that the cost of the CAP is excessive, either in relation to the entire EC budget or still less in relation to the capacity of the EC economies to pay for the CAP. The fact that the CAP accounts for a relatively large share of total EC budget (currently around 63%) simply reflects the fact that agriculture is the only major area of government responsibility which has been assigned almost in its entirety by the member states to the Community. In absolute terms, the CAP represents not much more than 0.5% of Community GNP. This is not large when it is considered that total government spending accounts for 48% of aggregate GNP of the EC member states.
76Nor is the Joint Committee wholly satisfied that the impact on the US and the Cairns group countries, of the exports of EC agricultural produce is, of itself, an argument for reform of the CAP. As noted above, the EC is a large importer of agricultural produce, including imports of produce from the US and the Cairns group countries.
77On the other hand the Joint Committee does agree that adjustment in the policy is needed to eliminate perverse results which include the accumulation of surpluses, the stagnation in aggregate farm incomes (despite the increase in CAP spending), the dissemination of intensified systems of milk, livestock and cereals production, and the continuation of an extremely skewed income distribution among the Community’s agricultural population.
78These pressures are such that even if a package of reforms was not adopted by the Community, changes of some sort would be forced on the CAP. Thus, to the Joint Committee the issue is not whether there should be reform or not because reform, or change, of one kind or another is inevitable. That being the case, then, the Joint Committee feels that in principle at least, it is better for a country with heavy dependence on agriculture like Ireland, that changes should come in the form of an integrated package, rather than as a series of disconnected and ill considered responses to a succession of “crises”. In the rush to respond to each crisis it is more likely than not that the needs of a small country, dependent on agriculture, will be overlooked.
79The Joint Committee recommends that the three main principles upon which reform of the CAP should be based are:
Effective Supply Management
Combatting Rural Poverty
80Community Preference is one of three pillars of the CAP as laid down in the original Treaty. Pressure from the Community’s trading partners in GATT has already led to compromise in this area, and the EC latest proposals promise to dilute the principle still further. However, in conjunction with an effective supply management policy, the Joint Committee believes that it is possible to reestablish community preference, and at the same time meet the legitimate needs of the EC’s trading partners in GATT.
81Under this heading the Joint Committee urges that the issue of rebalancing should be adopted as part of the reforms. Rebalancing would mean reducing the degree of protection now given to cereals production in the Community in return for increased protection against imports of cereals substitutes, much of which emanate from the US and now enter the Community free of levies. In conjunction with supply management policies in the cereals sector this would lead to a reduction in EC surpluses, exports and export refunds. Thus, a larger proportion of domestic production of EC cereals production would be disposed of internally while the reduction in EC exports would compensate for the fall in EC imports of substitutes.
82The Joint Committee also urges that the CAP reforms should be based on the premise that reductions in EC exports as a result of supply management measures should be accompanied by effective steps by the EC’s trading partners to reduce their exports reciprocally. If the other exporting countries expand production of cereals, milk, beef and other commodities, while the EC is curtailing its output of these commodities, world prices will still continue to fall, and much of the benefit of the EC’s reforms will be negated. As noted earlier in paragraph 37, this has already been happening in the period since 1986. The Joint Committee understands that under Chapter XI of GATT, the EC is entitled to restore export subsidies and import levies on those commodities where its trading partners decline to reduce their output.
83Finally, it is important to note that during a period when EC farmers are facing radical change in their economic environment, there are still significant imports of dairy products, sheepmeat, beef and cattle. The Joint Committee urges that these should be strictly controlled.
Effective Supply Management
84The general thrust of the Commission’s proposals is to deter production by reducing prices. The impact on farm incomes is then to be compensated for by compensatory payments related to limited numbers of animals and acreage tilled. This gives rise to two broad areas of concern to the Joint Committee.
1The reduction in cereal prices undermines the competitiveness of Ireland’s grass based cattle and milk production system and it encourages intensified forms of production;
2It constitutes a shift towards the “deficiency payments” system of agricultural support. This is the system now in place in the US, and which was in use in the UK prior to its entry to the EC. For wealthy countries with a relatively small farming community, this system has its attractions. But it is less viable in the EC context where the farming community is very numerous. This is because, if compensation is to be adequate, it will have to be a heavier financial burden on the CAP budget than the existing price support system which diffuses some of the burden of supporting farm incomes amongst consumers.
85A deficiency payments system is vulnerable to attack on two fronts:
1The burden of direct taxation required to fund the compensation payments will be highly visible and would probably attract political opposition;
2The IFA has also made the point that some of the direct payments proposed by the EC can be included as policies which ought to be reduced under GATT rules. This is because, being paid on a headage or acreage basis they are linked to production. Thus, it is not unlikely that the Community’s negotiating partners in GATT will object to the Commission’s proposals. The fact that the US has offered to put its deficiency payments into negotiation, strengthens this possibility.
86The Joint Committee therefore recommends that the price cutting proposals in the Commission document should be largely modified. Instead, supply management measures should be put in place in each of the main commodities to reduce the quantities supplied.
1Cereals: Severe price cuts are likely to prompt some farmers to intensify their production. Others will experience lower incomes. What the Joint Committee recommends is emphasis on set aside. It also recommends that land that is set aside should be available for farming any non-surplus commodity.
2Milk: Again, price cuts should be avoided and supply controlled by means of quota cuts. These should fall on highly intensive producers now relying on imported feeds. Reliance can also be placed on effective Community financed schemes of voluntary cessation. However, if quotas are to be applied globally, given Ireland’s acknowledged dependence on this commodity, and the fact that Irish production is grass based, this country should be exempt from quota cuts.
3Beef: The Joint Committee believes that the current surplus in this commodity may prove to be related to temporary factors like the Gulf War and the BSE scare. Consequently, the large price reductions proposed by the Commission may be unnecessary in the medium term. But if supply is to be controlled the Joint Committee considers that the reduction in the milk quota will lead to a fall in beef production. If further cuts are required these can be introduced, as required, on special categories such as low quality calves. In any case the stocking rates proposed by the Commission will impose severe constraints on many thousands of Irish farmers and must be rejected.
4Sheep: At the moment the Community is in deficit in this commodity and the Joint Committee believes there is no need for price cuts. However, quantitative controls may be required if there is a shift from other commodities into sheep production. In that event, the limits on ewe premium payments should be effective, though more realistic limits should be applied to flock sizes than is currently proposed by the Commission.
Combatting Rural Poverty
87The Joint Committee agrees that the extent to which small farmers have not benefitted from the CAP is one of the salient weaknesses of the policy. Reform measures proposed by the Commission are indeed oriented towards smaller rather than larger farmers. But in the view of the Joint Committee these measures do not go far enough in addressing the problems of the smallest farmers and generally those on low farm incomes. In this respect, it should be recalled that there is a high incidence of rural poverty in Ireland. The Joint Committee therefore recommends that the reform proposals should include measures targeted at these groups. Specifically, the Joint Committee endorses the IFA proposal that direct income support grants based on assessment of farm incomes should be instituted. This scheme should be co-financed by the member states with the size of the EC contribution inversely related to regional incomes.
88The emergence of surplus milk and beef in the Community in recent years is partly attributable to adverse perceptions of the nutritional and health qualities of these products. The Joint Committee believes that the reform proposals ought to include provision for significant funding by the Community of a programme of information and promotion aimed at combatting these perceptions.
89The Irish processing industry faces a difficult challenge in adapting to the changes which are being brought about by the ongoing, and forthcoming restructuring of the CAP. The Joint Committee urges that an expanded scheme of EC financed aids, available under flexible criteria, towards Research & Development, product development and market development by processors in peripheral regions be part of the reform proposals. A reform which would greatly help the position of Irish processors in particular would be if premia could be paid in a counter seasonal way.
90Irish agriculture is of fundamental importance to the Irish Economy. The development of the CAP in recent years has given rise to problems, but these are due to a variety of factors, and Irish agriculture has contributed little to them. Nevertheless, the evidence before the Joint Committee shows that Irish agriculture is very exposed to the impact of these reforms and will suffer disproportionately. For these reasons the Joint Committee rejects the proposals and recommends alternatives. These alternatives will help the chances of survival of the Irish family and commercial farms alike, and of the many thousands of jobs in industry and services which depend on agriculture.
91The Joint Committee in laying this report before the Oireachtas, urges the Minister for Agriculture & Food and the Government to note its contents and to take action on the issues discussed which are of such critical importance to the future of agriculture in Ireland and indeed the whole Irish economy.
PETER BARRY T.D.
CHAIRMAN OF THE JOINT COMMITTEE
(24 July 1991)